In this article, our goal is to teach you how to become a consistent trader and make money trading the financial markets from the comfort of your home without worry.
When it comes to trading the financial markets of any sort, most people seem to gamble away their money, only a few traders can actually depend on their profits from the market as a regular source of income, comparable to monthly salary of a worker.
This must not be the case, you need to get 3 basic things right in order to make consistent income trading the financial markets.
Table of Contents
What is required to become a consistent trader
The Consistent Trader Requires the following;
- The Method
- Money Management
- Psychology (Management of the Self).
The Methodology of a consistent trader
In any given time frame, the market has two options, to go up or down, but the order in which that would happen follows no particular uniformity. In most situations, whether the trading instrument would go up or down can be likened to the throwing of a coin.
Would you risk a thousand dollars by the flip of a dice ? I guess not, and yet why would you risk a thousand dollars just on a single decision as to whether the market would go up or down?
Why would you risk your entire trading account on a single trade and get margin called or blow your account?
There is a great deal of randomness in any market, be it Forex, Stocks or Crypto-currency’s, this randomness makes’ any trading akin to gambling.
How then does one play this game?
Imagine that you have a thousand dollars to bet on whether the Euro would rise or drop against the dollar. If you win, I give you two thousand dollars, if you lose I take your thousand dollar. Would you play this game?
Definitely, this seem like a game skewed to your progress or success. If you lose half of your prediction on the EUR USD in this game, i.e 5 out of 10 trades betting 1000 each time, you would walk away with five thousand dollars.
You lost half and still walked away with 5,000 dollars, let’s assume you lost 60% of the trade’s. Your losses out of 10 trades would be – $6,000 while your wins would be $8,000, giving you a net profit of $2000.
If it were that simple, why don’t many people do this? I am glad you asked.
Many people are still playing the first game, where they loose more than they gain, therefore even if they win more than they lose on their trade’s they are still net negative.
You need to rig the game to your favor, finding a method that would make you gain more when you win, and less when you loose.
Most trading strategies out there actually lose money on the long run, while the win rate is important, being able to take control of how much you actually win or lose in dollar terms is especially important.
Find a method, that gives you at least twice the risk you take, and it won’t matter if it’s win ratio is 40%, you would still come out successful.
A strategy that has a win rate of 50% of all trades is a very successful strategy, but it doesn’t seem to sell to the masses.
People want lofty percentages, you see it all around, on Facebook and other forums, people advertising 80% or even 100% win rate strategies, the truth is that most of these systems lose money in the long run, but they sell because that is what you have been accustomed to believe makes one successful, it is not!
Take a moment, find something that works even half of the time, and you are already there. If you can be right 50% of the time, and you can make twice as much when you win than when you lose, that is when you know you are in business, to trade this market for the rest of your life and becoming successful.
Do not be scared of losing money, be ready to risk money in a smart way, to make more back. If you can sort this out, you would have found a method to the madness that exists in the Forex market.
Imagine, trading with such a method, such a system, that system is easier to come by, what may be the most difficult part is staying consistent and disciplined with such a system.
However, all it takes is practice, the nature of the universe is that with practice, things that are immediately difficult to you, becomes second nature with time.
I do not cringe when I lose a trade, I worry not, I do not become overly excited when I win either, I know the method works, why worry my head over something that I know already works marvelously well?
And guess what? You sleep better, knowing tomorrow is assured, you can go to sleep knowing that come what may, something good is happening to you.
Do not fall for the crafty marketing tips of high win rates. When they win, they win 100 pips, when they lose, they lose 500 pips. The system essentially losses money. These guys do not care because they do not make money trading, they make money selling you a trading system.
You are smarter than that!
Money Management
Would you risk your entire net worth on a bet as to whether it would rain today or not? I know I wouldn’t, but that is what most of you do. You risk an entire portfolio on a single trade, based on your emotional predisposition to be right.
The only person you need to be right to when trading the financial markets, is your account, nothing more, nothing less.
If you have a strategy with a win rate of even 80% albeit very rare, I have news for you, in probability theorem, the law of large numbers states that ‘In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times.
According to the law, the average of the results obtained from a large number of trials should be close to the expected value and will tend to become closer to the expected value as more trials are performed.’
The LLN is important because it guarantees stable long-term results for the averages of some random events. For example, while a casino may lose money in a single spin of the roulette wheel, its earnings will tend towards a predictable percentage over a large number of spins. Any winning streak by a player will eventually be overcome by the parameters of the game.
This tells us that your win rate would not actually follow in that particular order in say 10 or 20 trades, but more importantly, you get towards your win rate over the course of a high number of trades say 100 or even 1000.
In order to stay in the game to play long enough to achieve that win rate, you need to risk not more than 1% of your capital on each trade. If you risk 5% in a single trade, and you have 4 continuous losses, that is 20% of your capital gone, what does that do to your psychology?
Most of us risk 1% for a while, and then we see the results and we ask ourselves what would have happened should we have risked 10% of the capital on each trade, we do the maths, nod to ourselves, and set off risking 10% of our trading capital.
Before long you have blown the account, and wallowing in emotional misery. If you want to win at the game of trading, stay long enough and the market would sort you out.
Emotional Management
In a 50% win rate system, you get on average 2 bad trade’s every 4 trades you take, and these trades come in no particular order. You could lose the first 2 and win the next 2, either way, losses are to be expected.
If you are to bet 50% of your portfolio on any one trade, you would blow your account every 4 trades.
These are the bare facts, most traders do not reach 50 trades before they blow their accounts.
When you win a couple of trade’s you feel like a god, thinking you are invisible, that you have an upper hand over everyone in the market.
Even trader’s who stick to the 1% risk rule often break this rule after they have made some consistent profits over time.
This is when disaster strikes.
Accept it, you are no god, you are just a participant in a rigged game, and a game you have rigged to your favor, do not let the rush of Serotonin, dopamine, oxytocin, and endorphins cause you to think otherwise.
If you have had a continuous streak of wins, chances are that your losses are just waiting at the corner, smiling at you, bidding its time.
Remember, your entire success as a trader is based on your ability to manage these losses, and limit these losses to the barest minimum.
If you fail to do this, you are no trader after all, you are just a gambling addict, seek help!
Do not think you are sure of any particular set up, so much that you bet more than 1%, the results of your analysis are subject to the randomness of the market, probabilities.
You could get long runs of good trades that make you feel you are a god and long runs of bad trades that make you feel cursed.
If you are going through bad trades, your job is to hang in long enough to get to the good trades.
That is your job, to become an effective portfolio manager. You should know, how much randomness exists in the market, how much madness exists in the market and be humble enough to let that knowledge be your guide.
The best traders I know, are the most humble people on the planet, arrogance would take you no where, at some point you would fail, the market would humble you, allow that process to happen, and learn from it, learn from your mistakes, and never risk more than 1% if your capital in any trade.
One good trade, two or three good trade often changes people completely, I know new traders who run to the bar to celebrate, some check the prices of their dream cars, their dream homes. We become euphoric, invisible.
Only to return in this state of euphoria to blow their accounts.
How long are you going to go through this hell, this emotional abuse, how long are you going to blow your account, fund it, blow it, only to fund it again?
There is no wisdom in risking all you have got to double your account size in a day or week when in truth you are actually going to blow that account, and when the best opportunities come, you have no trading account to take them.
In your journey as a trader, know that there would be good and bad days, good and bad trades. Be patient enough, be smart enough to survive the bad days, and then become smart enough to enjoy the good days more abundantly. That is how great traders are made, that is how success become your portion.
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